Singapore — Moody’s Investors Service has placed on review for upgrade the B2 corporate family rating (CFR) of Indika Energy Tbk (P.T.) (Indika) and the B2 ratings on the $500 million backed senior secured notes issued by Indo Energy Finance II B.V. and the $265 million backed senior secured notes issued by Indika Energy Capital II Pte. Ltd.
The review follows Indika’s announcement on 25 September 2017 that it has signed share purchase agreements with Samtan Co. Ltd and Muji Ini Utama to acquire an additional 45% of the shares of Kideco Jaya Agung (P.T.), Indonesia’s third largest coal producer.
Post-acquisition, Indika’s ownership in Kideco will increase to 91% from the current 46%. Completion of the transaction is subject to customary regulatory and shareholder approvals.
The total purchase consideration comprises an upfront payment of $517.5 million and a contingent liability of $160 million, which will be adjusted for certain terms and conditions. The acquisition will be fully debt funded and expected to close by the
end of 2017.
“We view the proposed acquisition of Kideco as credit positive as Indika will gain control over the third largest coal mining asset in Indonesia which has a long reserve life of over 13 years, based on its projected 2017 production volume. The company’s credit profile will also improve post-acquisition, with consolidated leverage of around 3.6x on a
look-through basis,” says Rachel Chua, a Moody’s Assistant Vice President and Analyst.
“Upon successful completion of the transaction, such that the acquisition cost and funding structure are in line with our expectations, the ratings will likely be upgraded by two notches,” adds Chua, who is also Moody’s Lead Analyst for Indika.
Moody’s review will focus on: 1) the timing, execution and structure of a successful acquisition by Indika; 2) the final funding structure of the transaction; and 3) Indika’s capital structure, credit profile and interest burden following the completion of the proposed transaction.
Moody’s will conclude the review at the completion date of both the acquisition and its associated financing.
While the ratings could be upgraded to Ba3, subject to a satisfactory conclusion of the review, reflective of Indika’s medium term credit profile, there will remain a high degree of event risk given the expiry of Kideco’s coal contract of work (CCoW) in 2023.
Negotiations for the extension of the CCoW can only commence in 2021 and while it is our current view that an extension on similar terms will be forthcoming, we remain cognizant of the regulatory risk and the impact on Indika’s credit profile and ratings should that renewal not materialize in a timely fashion.
Indika Energy Tbk (P.T.) is an Indonesian integrated energy group listed on Indonesia’s Stock Exchange. As of 30 June 2017, its principal investment is a 46% stake in Kideco Jaya Agung (P.T.), Indonesia’s third-largest domestic coal producer and one of the world’s lowest-cost producers and exporters of coal.